Buying a Home Using Gift Funds

What are the rules for buying a home when you receive gift funds?

Many home buyers receive gift funds from parents or other family members to help with the purchase of a first home. Gift funds are permitted to be used for down payments and closing costs depending on the mortgage loan program and the total down payment.

Home buyers are still expected to have some savings available of their own funds after closing (called payment reserves), and home buyers should be prepared for the true costs of home ownership once they do buy a home.

Down payments and gift funds

For conventional Fannie Mae and Freddie Mac loans, borrowers are normally required to make a down payment of at least 3% or 5% and all of that required down payment needs to be the buyer's own funds. Any funds received to increase the down payments above that amount can be all gift funds. The exceptions to this rule is the Fannie Mae Flex 97 and Community Lending programs, which like the FHA program do allow the entire required down payment to be gift funds.

For the FHA purchase mortgage program, the required 3.5% down payment can be 100% gift funds.

Gift funds (or any other funds received) are considered to belong to a buyer if they have been seasoned for at least two months. In terms of getting approved for your loan, this means that any funds received by you that were gift funds more than 60 days ago actually count as your funds. For example, if you get married in July and receive $10,000 in wedding gift funds, you can count that as your own funds if you keep that money in the bank during August and September and then apply for a loan in October.

How Does a Relative Give a Gift to a Home Buyer?

The rules for gifts have been tightened in the past two years (as have all underwriting rules). In the past few years, all that was needed was the name of the donor and the amount they were giving. Today, underwriters have gone back to the old method of verifying gifts which means that donors and recipients must do the following for a real estate transaction:

1. The donor must provide a letter about the gift including:
• Donor's name, address, telephone number
• Donor's relationship to the borrower
• The address of the property being purchased
• The exact dollar amount of the gift and the date the funds were transferred
• A statement that "no repayment of these gift funds is expected
• The letter must be signed and dated
2. The donor must provide documentation to verify that sufficient funds to cover the gift are either in the donor's account or were in the donor's account prior to the transfer.
3. The donor and recipient must provide proof of the transfer of the funds (ideally, a copy of the recipient's bank statement showing receipt of funds and a copy of the donor’s check)
4. All gift funds must be transferred prior to closing.

In some cases, when a borrower is putting down more than 5%, less documentation may be required. But donors and recipients should be prepared to provide this documentation to verify the payment and receipt of the gift.

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